One of our distinguished Finance Ministers had made this famous statement in one of his speeches, “Even God would not like to pay taxes!” reinforcing the general dislike of tax payers in paying taxes.

However, our lawmakers are human, and they understand this general aversion of people to pay taxes. That may be one of the reason that while drafting tax laws they have also given opportunities to pay lower taxes with provisions for exemptions.

The Income Tax Act, 1961, covering the Capital Gain Tax is also not an exception to the rule.

What is Capital gain Tax?

Wikipedia has defined capital gains tax (CGT) “is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property”.

The Income Tax Act, 1961, states that the incidence of tax on Capital Gains depends upon the length for which the capital asset transferred was held before the transfer.

Short term Capital Gains Vs Long Term Capital Gains

Ordinarily a capital asset held for 36 months or less is called a ‘short-term capital asset’ and the capital asset held for more than 36 months is called ‘long-term capital asset’.

However, shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognised Stock Exchange are to be considered as short term capital assets if held for twelve months or less and long term capital assets if held for more than twelve months. Tax exemptions are available only in long term capital gains.

How we can avail these exemptions?

Section 54 of the I T Act, 1961, explains availing of the exemptions:

Section 54: Capital Gain Tax Exemptions when sold residential house and then buying another residential house.

A person or HUF sells a residential property, which is a long term capital asset, i.e. it is owned for more than 3 years, and the capital gains (difference between purchase and selling price of the asset) is invested in buying another residential property, either within one year before the sale or within two years after the sale or constructs a residential property within three years of the sale, and holds on to the residential property for three years, is entitled to the exemption under this section of the Income Tax.

Section 54 B: Capital Gain Tax Exemptions when sold agricultural land and then buying another agricultural land

A person sells agricultural land which has been owned and used by him or by his parents for at least two years, and the and the capital gains is invested in buying another agricultural land within two years,is entitled to the exemption under this section of the Income Tax.

Sec 54EC: Investment of capital gains in Long-term Capital Gain Bonds

This section provides that capital gain arising from the sale of a long-term capital asset shall not be charged to tax to the extent such gains are invested in ‘long-term specified asset’ within a period of six months after the date of such transfer.

‘Long-term specified bonds’ means any bond, redeemable after three years and issued on or after 1-4-2006 by NHAI and REC.

This exemption was available up to a maximum of Rs.50 lacs per financial year.

Sec 54 F: Capital gain tax exemption on sale of certain capital assets in case of investment in residential house

In the case of a person or a HUF, the capital gain arises from the sale of any long-term capital asset, not being a residential house, and the tax payer has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, will qualify for the exemption.
Hope the above explanation on the capital gain taxation has given you a clarity and a better understanding on the various capital gain tax exemptions and its modalities.

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